‘It Has Been Too Long’: Junk Heaven

[For maximum comedic effect, read the first three sentences out loud, using your best Donald Trump voice]

Listen, there is no risk in junk bonds, ok?

That’s why they call them “junk” bonds, I hate to tell ya. It’s because they’re completely safe – a lot of people are saying that.

[Ok, now back to reality]

High yield is a bubble – still. And that’s after underperforming IG since March (remember, IG/HY decompression just mitigates the relative richness – it doesn’t mean junk isn’t still a bubble).

The situation in Europe borders on lunacy. Thanks in no small part to the ECB’s CSPP (which has effectively turned the central bank into a giant corporate credit ETF), valuations are stretched to historical extremes and there’s no more poignant illustration of this than the following set of charts BofAML put out back in August on the way to calling € junk an “eye-watering bubble“:

Meanwhile, back at the stateside Ponderosa, things aren’t much better. Leverage has become completely disconnected from spreads (i.e. corporate debt prices are detached from corporates’ ability to service that debt), which are near post-crisis tights. As far as the cycle goes, just read this from BofAML:

It has been too long. Way too long by the standards of its predecessors, and yet this credit cycle still shows few signs of an impending turn. At eight years and counting since the last time we saw a double-digit HY default rate, the current cycle has already outlived its predecessors of the past thirty years, or as far back as the history of modern HY corporate bond market goes. Previous episodes of debt buildups and cleansing have ranged between 5 years in 1984-1989, 7 years in 1992-1999, and 6 years in 2002-2008.

Here’s more ammo for the skeptics in the face of the relentless credit rally: U.S. high-yield bonds are trading in the tightest range in 20 years, underscoring the notion that the grab for yield has lulled investors to sleep.

So far this year, the difference between the highest and the lowest spread notched at the index level is 71 basis points. The range, one measure of volatility, is narrower than in 1997 and 2006, years that marked the peak of the global credit cycle, according to analysis from CreditSights Inc., citing Bank of America Merrill Lynch data.

That is the very definition of absurd. Note that the range last year was around 475bps.

And can you guess what that means for everyone’s favorite mom-and-pop junk bond ETF? Well, it means this:

Let me just remind you, for the umpteenth time, that these bonds will be highly illiquid in a pinch. And by God you can bet that when the cycle finally does turn and the firesales start, the orange bar that gets added to the Bloomberg chart shown above is going to be so damn tall that they’ll have to modify the scale on the y-axis.